Welcome to the University of Illinois Country Level Economics course. Macroeconomic variables and markets. This course is the first part of a two course series on macroeconomics for business. Macroeconomics is a very exciting subject to study especially these days. Macroeconomics help us better understand total income in the country, inflation rate, unemployment rate, exchange rate, interest rate. Understanding how these variables are determined is a bit complicated because they interact with each other and they interact with thousands of other variables. So let me give you an example of how one can see the complexity in the interaction among these variables. Let me start with this case. On November 6, 2015 the Bureau of Labor and Statistics announced that the US economy had generated 271,000 jobs in October of 2015. That's well above average and unemployment rate has remained unchanged at 5% at the time. Which means that while more jobs are being created, more people also had entered the labor market. This sounded like a good piece of news for the economy at the time. However, if you look at what happened in the stock market, the reaction was negative. All stock indices fell in the week after the announcement on November 6th. Why would this happen? Participants in the stock market probably looked at the data and thought that the Federal Reserve board looks at the same data and decides that the US economy is heating up or will be heating up and therefore will start raising interest rates faster. And if you are an investor, you want to keep your money for investing in bonds in that situation. Therefore you try to take your money out of the stock market. That's a possible explanation for what happened here and it's also consistent with what happened to the exchange rates. The US dollar grew stronger relative to the Euro. The euro fell relative to the dollar because people were expecting interest rates to go up in the United States and therefore, holding US dollar would be more profitable. And therefore, some investors switched from Euro to the US Dollar and pushed up the value of the US Dollar. But the situation, in fact, is a bit more complex than what appears here. In fact, this kind of effect does not always show up when unemployment rate goes down or employment improves. For example, let's take a look at the announcement on May 2017 by The Bureau of Labor and Statistics about the job market in April of 2017. 211,000 jobs were generated in that month, and unemployment rate fell to lowest level in ten years, 4.4%. But this time the stock market in fact went up and the dollar also fell rather than becoming stronger as we had seen before. The reading of this situation was different because the conditions were different. And understanding how those conditions, what factors come in and shape the expectations of investors in the stock market, participants in the foreign exchange market is very important, and rather complicated. So when we study macroeconomics, there are lots of questions we ask. For example, we want to know whether economic growth will continue or not, how fast it's going to continue, how long will interest rates remain at their current range? Will we ever see a budget surplus again in the economy? Do tax reductions, in the past or being proposed, deficits spending can help the economy or hurt the economy? How do fiscal and monetary policies affect economic conditions now and in the future? These are the kind of questions that we are going to be addressing in these two courses and we are going to start with microeconomic variables and markets in this course. We want to know what's also going on in other economies. And how those economies affect ours, how our economy affects the rest of the world. Macroeconomics is also concerned about why production and employment go up in some years, go down in some years? Why inflation is higher in some years compared to others? And how do inflation, income level, interest rate, exchange rate interact with each other? And also, what are the roles of the key variables, policy variables like interest rate or exchange rate, in determining income and employment? Another set of questions is, why average income is higher in some countries compared to others? Why some countries grow faster than others? And we also would like to know how economic performance in various countries interact with each other. To summarize, concerns about economic conditions is universal. People all over the world are concerned about their economic conditions and worry about these variables that we've discussed and we will be studying in this course. The purpose of this course is to help you make better decisions in your personal, professional, and public life. To be able to make better decisions you need to be informed about how macro-economic variables affect what you want to do. You want to know also how macro economic variables are determined so you can predict them, understand where they're going. And also you want to understand what are the key policies and other factors that shape macro economic variables. The objective of the course is to help you better understand the macro economic environment in which you live and work, both in the country you live in and also globally. This course provides you with the key tools you need to carry out such analysis, and hopefully, it will make you more effective decision makers, particularly better professionals. So what do we do in this course to help you learn these tools? First we are going to start with learning about macroeconomic variables, their measurement, and their interpretation. Second we're going to look at components of GDP, how different parts of the economy interact with each other and how we can measure different parts of the economy separately and then put them back together. We're going to learn about how the exchange rate affects the macroeconomy and how in turn macroeconomic conditions determine the exchange rate. And finally we're going to be looking at how interest rate is determined and how the money market works. [SOUND]
